After studying economics at school and getting good grades, I thought my understanding of demand and supply and the other economic factors was good. This 30 minute video by Ray Dalio, founder of bridge water associates took my knowledge to the next level. After watching the video you will be able to:
- Understand where we are in the economic cycle
- Predict what will happen next in the economic cycle
This knowledge will make you into a better investor and ultimately mean you become a wealthier individual. Anyone who is currently investing or even has an interest in investing should watch this video.
A little cheat sheet
If you do not want to spend thirty minutes watching the video, here are my quick take aways:
- The economy is a transaction based economy. A transaction is when a person sells goods/services and another person buys it.
- The amount of goods and services an economy can produce generally increases upwards in a straight line. This is because of advances in technology and strategy.
- The reason the economy does not follow this productivity line is because of credit/debt.
- This results in the short term debt cycle which lasts 5-8 years.
- For roughly 4 years banks lend credit to individuals allowing them to purchase goods/services beyond their means. This leads to the “boom” part of the short term debt cycle and increasing interest rates.
- The next four years individuals have to tighten their belts and constrict spending to pay off their debts. This leads to the “recession” part of the short term debt cycle and decreasing interest rates.
- The long term debt cycle occurs every 50-75 years and is also caused by credit. This leads to a big recession that occurs once a generation. Examples of this are the recession in 2008 and the wall street crash in 1928.
- The long term debt cycle is caused by banks and individuals lending/borrowing too freely and individuals can no longer pay off debts.
- This leads to the “big” recession where lowering interest rates does not lead to the economy recovering. The central bank is therefore forced to print more money to keep the economy afloat.
My thoughts on how this applies to the UK Economy post BREXIT
Disclaimer: My predictions are based upon my knowledge of the economy. I do not have a crystal ball and therefore my predictions can be wrong.
This post would have been much easier a week ago when we were not planning on leaving the EU. After the 2008 crash the British economy took 4 years to recover as the long term debt cycle predicts. We have recently been at the start of “boom” phase of the short term debt cycle with house prices rising and the consideration of interest rates rising. If Britain had not voted to leave the EU, I would predict the “boom” phase of the short term debt cycle to keep going for four years until interest rates start rising to a high enough level to deter borrowers from borrowing.
Since we have left the EU, I predict that in the short term (3years) not much will change as we will be operating under article 50. In the long term, I would envisage that our productivity line would be increasing at a shallower gradient because of poorer trade links.
Do you agree with my prediction? Did you enjoy the video? Let me know in the comments section below.